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Medicaid revenue to risk-based managed care plans has increased significantly in recent years, and there’s now mounting pressure on state Medicaid agencies to deliver quality care and contain costs. Agencies must consider the long-term stability of their Medicaid programs through changes in population, cost trends, and care practices. How Medicaid contracts are awarded to managed care plans can have a major impact on how well they support strategic outcomes and can have unintended consequences if agencies don’t carefully consider their specific markets and regulatory realities. This Medicaid briefing paper authored by Milliman consultants Jeremy Palmer and Rob Damler provides more perspective.

Ikaso Consulting’s Reiko Osaki and Tom Arnold also contributed to the paper.

Most states require that contracted managed care organizations (MCOs) file annual statements with state insurance regulators. The statements are typically based on a standard reporting structure developed and maintained by the National Association of Insurance Commissioners (NAIC), with prescribed definitions enabling comparisons across reporting entities.

This report by Christopher Pettit and Jeremy Palmer provides a summary of benchmarking financial metrics for the calendar year 2013 based on these statements, including medical loss, administrative loss, underwriting, and risk-based capital ratios. The target audience includes state Medicaid agencies and MCO personnel responsible for reviewing and monitoring the financial results of risk-based managed care programs.

In previous blogs, we’ve discussed population management concepts and given specific examples of pediatrics, accountable care organizations (ACOs), and clinical populations. In this blog we turn to the Medicaid population. Medicaid has unique characteristics because of the nature of the financing and because of the social demographics of the population served. This population is going through big changes because of Medicaid expansion and the advent of programs that may resemble some of the characteristics of Medicaid, such as subsidized rates through the federal and state exchanges.

A key to analyzing this population is to create homogeneous sub-populations. There are several ways to define the subpopulations:

There are specific issues that drive the metrics and analysis for Medicaid recipients, including:

• High levels of emergency room (ER) use: This population has much higher ER usage rates, which often reflect access and sociodemographic issues.
• Maternity: This population has higher rates of maternity and has wider variability in maternity outcomes.
• Behavioral health: Managing behavioral health is a more important component of care.
• Community resource access: Population wellness is much more dependent on additional community resources such as case workers, food banks, and social workers.

It’s important to focus on the key issues that drive the results for the population and to create metrics that reflect these key issues and characteristics. Below are some sample metrics that should be tracked and improvement goals developed.

Alternative Benefit Plan (ABP) regulations have created the ability for states to offer benefit plans tailored to the needs of a particular population, such as the Medicaid expansion population. These regulations require exemption for vulnerable populations, including one new exempt population: the “medically frail.” This population includes foster care children and those who meet Social Security disability criteria, but also includes anyone with a serious and complex medical condition or a disabling mental or chronic substance use disorder.

States are seeking a methodology to help them identify the medically frail, one that would be both accurate and administratively efficient. This paper describes a methodology that has been used successfully for identifying a similar population in the Healthy Indiana Plan, a Medicaid expansion program initially authorized in 2008 under 1115 waiver authority.

One area of data management within the healthcare industry that is getting new emphasis and interest from regulators is a focus on encounter data. Today, the majority of Americans receiving healthcare services funded through the Medicaid program are enrolled in some form of managed care. Under this scheme, states contract with managed care organizations (MCOs) that take on responsibility for providing Medicaid services in exchange for a fixed capitation payment. This approach is in contrast to the traditional fee-for-service (FFS) program where providers submit claims directly to the state for payment.

It is widely recognized that the FFS approach to provider payment creates perverse incentives for delivery of unnecessary services and uncoordinated care. Medicaid managed care gets away from this by providing a fixed capitation amount to the Medicaid MCOs, giving them incentives to more effectively manage care. The MCOs often pass along those same incentives by paying certain providers using capitation as well.

Notwithstanding the undesirable incentives that FFS creates, one area where FFS excels is the collection of timely and complete data about the services rendered to each patient and information about the price of those services. Because FFS claims are essentially invoices, this approach offers strong incentives for providers to submit claims in a timely manner (for prompt payment) and to ensure those claims are a complete reflection of services rendered (for complete payment).

Under capitation the payment mechanism is decoupled from the data collection process. In lieu of claims MCOs must collect encounter data from their providers and then submit that data to the states. Unfortunately, this takes away the direct financial incentives providers have for timely and complete data submission. As a result many states have struggled to collect credible information about the services delivered under Medicaid managed care. Such data is essential for important activities such as rate setting and program management.

Viewing submission of encounter data as an MCO function, many states have implemented strict contractual requirements coupled with tough performance guarantees and financial penalties to motivate MCOs to improve the quality and timeliness of the encounter data they submit. Failure to perform can have significant consequences for MCOs, including financial penalties, corrective action plans, bad press, and even contract termination. Based on our experience working with states and MCOs to help improve encounter data quality, we have identified a few things that can help improve the results:

1. Evangelize the importance of encounter data among providers. Once decoupled from the payment process it can be hard to convince providers of the importance of collecting and reporting encounter data. Ensuring that these constituents understand the value of encounter data and are submitting complete and timely information is key for MCOs to meet their contractual obligations to the state. Regardless of how strong the processes are within the MCO to ensure complete and timely submission, if the source information coming from providers is incomplete what goes to the state will also be incomplete. In addition to including encounter data requirements in their provider contracts, MCOs should include encounter data as a topic in their provider communication/education plans, and evangelize its importance whenever they can.

2. Develop clear submission requirements, definitions, and data specifications. In any situation where data is being submitted to a third party, lack of agreement and understanding of the actual submission requirements, definitions, and data specifications is a setup for downstream conflicts. Among states the requirements for submission often vary and sometimes change during the term of a contract. States and MCOs should engage in a collaborative process to ensure that all parties are working from the same guidance and interpretation of the submission requirements.

3. Establish an interdisciplinary team. Many MCOs view encounter data submission as one department’s responsibility—typically finance, operations, or information systems. In reality, it takes skilled and knowledgeable resources from throughout the organization to drive a high-quality process and result. MCOs should establish an interdisciplinary team that brings together the experts and makes everyone involved accountable for the outcome. That team may be led by someone from one of those primary departments but requires support from others.

4. Implement automated data validation and reconciliation processes. Submitting encounter data typically involves collecting data from multiple sources, transforming it into a new format, and then submitting it to the state. There are many opportunities for errors along the way. To provide an early warning of potential errors and to facilitate root cause assessment when errors are identified, MCOs should implement data validation and reconciliation processes that run parallel with the encounter submission preparation process. Often states will have internal processes they run on the data when they receive it; mirroring these processes can proactively reduce error rates. In addition, where possible, it makes sense to reconcile financial information against financial systems such as the general ledger, not just what’s in the claim system.

5. Track and resolve errors promptly and completely. When submitting encounter data some errors are unavoidable and thus both MCOs and states must have resources and processes in place to support timely and complete resolution of those errors. Errors can be caused by changes in the way data is collected within the MCO, changes in the state’s internal validation processes, or simply anomalies in the data. Regardless of the reason, each error should be tracked and resolved to completion. Root causes should also be identified to allow for error prevention.

As states have made the transition from FFS to managed Medicaid, the quality of utilization and cost data they receive has eroded. With the majority of Medicaid beneficiaries today receiving healthcare services through managed care plans it is more difficult for states to perform effective oversight of these programs. Multiple encounter data improvement initiatives have emerged as this has become an area of focus for both states and the federal government. MCOs should expect this scrutiny to continue, but should also recognize that through a systematic approach to managing and reconciling data and a collaborative posture with their state partners many of these challenges can be overcome.

The model for delivering care to the developmentally disabled (DD) population is likely to undergo fundamental change, financially impacting the agencies and healthcare providers serving this market. One of the strategies New York state is developing in response to the high cost of Medicaid benefits for DD beneficiaries is the establishment of licensed managed care organizations that will coordinate care for this population on a capitated basis. These organizations will be called Developmental Disabilities Individual Support and Care Coordination Organizations (DISCOs).

In this paper, Milliman consultants describe the upcoming changes to the Medicaid benefit framework and some of the challenges facing the managed care organizations and providers serving this population. Here is an excerpt:

There has been much speculation about the financial structure of the DISCO program, and the state has not released many details. One possibility, consistent with New York’s other Medicaid managed care programs, is a system of capitation payments. Capitations are predetermined amounts paid to the managed care plans to cover the full amount of benefits, regardless of the amount of services a particular individual uses. These capitation payments are often risk-adjusted based on risk-assessment tools, in the case of the Managed Long-Term Care (MLTC) program,2 or based on members’ health claim diagnosis codes and other data, in the case of the Medicaid Managed Care program.

Although the state has been testing various risk-assessment tools over the past few years, there is currently no risk-adjustment mechanism for DD Medicaid beneficiaries in New York. Without a proven risk-adjustment tool, DISCOs may incur a great amount of risk because benefit costs vary widely among individuals, as seen in Table 1. Until such a mechanism can be developed, some experts suggest that DISCO premium rates should be based on member characteristics such as age, residential needs, and other factors that will more accurately predict their benefit costs. A major drawback of this approach, however, is that too many premium variations (or rate cells) could provide little incentive for DISCOs to truly transform the system.

A risk corridor program is another approach that could mitigate the risk for DISCOs until a risk-adjustment mechanism is in place. This approach has been used as part of the New York’s MLTC program for new members under mandatory enrollment. CMS is also using risk corridors as part of the individual and small group exchange programs in the commercial market. A typical risk corridor program establishes a per-member-per-month
(PMPM) budget, and if a plan’s actual costs are less than the budget, the plan retains a percentage of the savings, and the remainder is paid back to the state (or CMS). If actual costs are greater than the budget, then the state (or CMS) will share a portion of the losses with the plan.

Capital requirements for DISCOs are also a matter of speculation, given the high average cost of benefits per member. In New York, both start-up and ongoing capital requirements for Article 44 managed care plans are based on a percentage of premium or capitation revenue. In the case of MLTC plans, the capital requirement is set at a fixed rate of 5% of premium. However, other managed care plans are required to hold 5% of premium in the initial year of operation, and the required percent of premium increases by one percentage point each subsequent year until reaching 12.5%. The state has hinted that the capital requirement for DISCOs may be less than other types of managed care plans, but actual details have not been released.

Expanding state Medicaid eligibility under the Patient Protection and Affordable Care Act (ACA) will introduce new populations of parents and childless adults to state Medicaid roles. These populations will have a significant impact on the demographic profiles of states that are expanding their Medicaid programs.

• Eligibility Changes: Under the ACA, many of the current Medicaid-eligible populations will have different eligibility rules regarding income and assets. Income will be converted to a Modified Adjusted Gross Income (MAGI) standard for all states. Medicaid eligibility for the children, parent and childless adult populations will no longer have an asset test. In addition, the Medicaid program will receive referrals from the health insurance exchanges. All of these eligibility changes may create enrollment delays as individuals are navigating the new eligibility rules.

• Presumptive Eligibility: Many current Medicaid programs provide presumptive eligibility for pregnant women. Presumptive eligibility provides immediate coverage based on the individual meeting certain criteria. Under the ACA, presumptive eligibility is expanded beyond the pregnant women population. Hospitals may provide presumptive eligibility for individuals who meet certain eligibility criteria. The expansion of the presumptive eligibility provision may increase the average health care costs for the Medicaid populations since individuals will be receiving eligibility at the point of care.

• Pent-up Demand for Services: Individuals who are currently uninsured may have pent-up demand for health care services. In 2008, the state of Indiana implemented a Medicaid expansion program: the Healthy Indiana Plan. The Healthy Indiana Plan provided expanded Medicaid eligibility for parents and childless adults through an 1115 waiver. During the first year of the program, it was observed that individuals incurred overall health care costs 20 percent greater during the first three months of enrollment in the program, with hospital inpatient and outpatient services 20 to 40 percent higher. Pharmacy expenditures tended not to be greater during the earlier months of enrollment; however, the pharmacy expenditures increased after six months of enrollment.

• Access to Providers: On a national basis, the average physician reimbursement rate under the Medicaid program is approximately 60 percent of the Medicare reimbursement rate. Physician reimbursement varies significantly on a state-by-state basis. The ACA provides for increased physician reimbursement to qualifying primary care physicians for evaluation and management services during calendar years 2013 and 2014. While this provides for short-term enhanced funding to primary care physicians, the long-term funding issue remains for physicians under Medicaid. The newly eligible population may encounter issues related to physician access, especially as the newly eligible population ramps up into the system and more people seek care.

Risk-based managed care is the current platform from which Medicaid recipients receive healthcare benefits, at least in part, in more than 30 states in the United States. Managed care organizations (MCOs) of all varieties contract with state Medicaid agencies to deliver and manage the healthcare benefits under the Medicaid program in exchange for predetermined capitation revenue.

This report authored by Jeremy Palmer and Christopher Pettit summarizes the calendar year (CY) 2012 experience for selected financial metrics of organizations reporting Medicaid (Title XIX) experience. The information was compiled from the reported annual statements. The primary purpose of this report is to provide reference and benchmarking information for certain key financial metrics used in the day-to-day analysis of Medicaid MCO financial performance. The financial results are summarized on a composite basis for all reporting MCOs. Additionally, this report explores the differences among various types of MCOs using available segmentation attributes defined from the reported financial statements.

Arkansas has proposed using Medicaid expansion dollars to provide subsidies so that eligible individuals can purchase health insurance through the exchange. The U.S. Department of Health and Human Services has indicated that it will consider approving such proposals.